Tax Shelters Saved Billionaires a Bundle

A Senate committee today plans to criticize multimillion-dollar tax-avoidance schemes used by four prominent individuals, to highlight what it concludes is a more than $40 billion-a-year drain on federal coffers by offshore tax scams.

The panel is scheduled to release a 370-page report, which it provided to The Washington Post, that details how these wealthy, politically connected people ducked hundreds of millions of dollars in tax payments by using secretive corporations and trusts on the Isle of Man. The billionaires who took advantage of this tax haven included Robert Wood Johnson IV, owner of the New York Jets football team; Sam Wyly and Charles J. Wyly Jr., longtime Republican donors and backers of President Bush; and Haim Saban, a Democratic Party fundraiser who made his first fortune promoting Mighty Morphin Power Rangers.

"I hope the report will blow the lid off schemes that use shell corporations, sham trusts and fake transactions to avoid paying taxes," said Sen. Carl M. Levin (D-Mich.), whose staff conducted 80 interviews and sifted through more than 2 million documents during the year-long probe. The inquiry is a follow-up to work that helped uncover hundreds of overseas shell corporations used by Enron Corp.

Johnson, Saban and the chief executive of their tax-shelter broker, Quellos Group LLC, along with a battery of lawyers and bankers, are expected to testify today before the panel -- the Senate's Permanent Subcommittee on Investigations, on which Levin serves as the senior Democrat. The Wylys were invited to testify but will not attend, their spokesman said.

The report said that, along with a few others, Saban and Johnson -- a major GOP donor and an heir to the Johnson & Johnson consumer-goods fortune -- were able to buy, for relatively small fees, roughly $2 billion in capital losses that they used to erase taxable gains they garnered from stock sales. The U.S. Treasury lost an estimated $300 million in revenue as a result.

The series of transactions that produced the bogus losses, Levin said, "looks like a bowl of spaghetti" on a chart provided by the committee. In essence, two companies set up on the Isle of Man in the Irish Sea traded paper back and forth until it looked like they were selling a portfolio of stocks that had lost value equivalent to the profit Saban and Johnson wanted to eliminate for tax purposes.

As evidence that the trades were "phantoms" rather than real, Levin noted that the Isle of Man firms, called Jackstones and Barnville, had paid-in capital of 2 pounds sterling yet claimed to be transferring stocks worth $9.6 billion.

In a statement, Johnson said he had been advised by his lawyers in 2000 that the transaction "was consistent with the Tax Code." But after the Internal Revenue Service challenged that view in 2003, Johnson this year "settled with the IRS and agreed to pay 100 percent of the tax due plus interest."

Saban has been cooperating with the subcommittee, a spokeswoman said in a statement, and "welcomes the opportunity to relate his personal experiences to the senators." She added that Saban, who "relied upon the assurances of his long-term tax advisor," is "arranging with the IRS and state authorities to pay the taxes, interest and substantial penalties stemming from that transaction."

Quellos Group said in a statement that the "transactions were appropriate tax deferral strategies carefully reviewed and approved by some of the most prestigious law firms in the country." It added that the company "fundamentally disagree[s] with the report, which presents a one-sided view and ignores all information that is inconsistent with its conclusion."

The Wylys, who made their money in computer software and art supplies, were able to shelter an estimated $720 million in profits over more than a decade using a different, though equally intricate, method, according to the report. It said the Wylys used a series of trusts on the Isle of Man to pretend that funds that originated with and benefited them were not theirs.

The report asserted that the Wylys sent $190 million in stock options to the offshore trusts in 1992 and then claimed they did not owe taxes on their gains because they were converted into annuities and funneled through "independent" trusts. The report disputes that the money was held independently, however, because the Wylys directed the trusts' actions and later used their assets to acquire property for their families, such as jewelry, ranches and masterwork paintings.

William A. Brewer III, a lawyer for the Wylys, said in an e-mail that the Wylys "continue to believe that their actions were entirely proper under law" and "believe they have paid all taxes due." He added that the Wylys acted on the advice of "qualified professionals."

Levin said he hopes that the committee's study will instigate changes in the law that will make it harder for tax sheltering to proliferate. He said he wants to allow the IRS to presume that income from trusts or corporations in tax havens is taxable and make taxpayers prove that it is not. He also proposes to force financial institutions to report to the IRS when the beneficiary of foreign companies is an American.